Wednesday, April 25, 2012

Income Inequality and What It Means

Is income inequality really a bad thing?

Or is it a good thing?

How prevalent is it in America today? And how is it calculated?

And after answering those questions, should we dedicate our efforts to providing more income for the lower earners or to reducing the income of the higher paid among us?

And what determines whether we're likely to become low or high earners--education, hard work, luck-- or a combination of all three factors? {We'll save the answer to that question for the end of today's story.}

Jenkins: The Inequality Obsession describes the situation:

"If it were learned that the car driven by the average American is 10 times more likely to burst into flames than the car driven by the richest 1%, what should the policy response be? Should it be to mandate that cars driven by the rich burst into flames more often?
Income inequality is a strange obsession, at least to the extent the obsessives focus their policy responses on trying to adjust the condition of the top 1% rather than improving the opportunities of everyone else.
Income inequality could be a sign of real pathology in authoritarian societies where entrenched groups use government-granted privileges to protect themselves from competition. By and large, that's not the case in the U.S., where most see the market actually increasing the competitive advantages of the educated, skilled, hardworking and talented.
Though it's always good to be on guard against political favoritism, the U.S. exhibits mostly a giddy process of wealth creation by people from middle-class backgrounds who start companies or become Wall Street traders or CEOs or celebrity performers in entertainment and sports.
Generalizing about the distribution of incomes is an academic specialty seemingly incapable of freeing itself from tendentiousness. Take a popular study by Thomas Piketty and Emmanuel Saez, two French-born researchers, claiming U.S. income inequality is higher than anytime since the 1920s.
Their result comes from choosing to look at income that leaves out transfers. Unlike the 1920s, Americans today have the opportunity partly to live off Social Security and Medicare. They can decide to do without reportable income. Also left out of the calculation is the large share of compensation accounted for by untaxed health insurance.
Too, the tax code has changed. Income is realized under today's code that wouldn't have been realized under previous tax codes. Owners of capital buy and sell much more easily, and the tax system creates much less incentive for them to sit on their holdings and report less income.
For the record, so sensitive are the inequality generalizations to how you define income, and whether household size is taken into account, that the claimed shift toward greater inequality can be made easily to disappear, especially when consumption rather than income is measured.

And, as always, the solution to income inequality amounts to persuading the rich to report less income. As CNBC's John Carney has shown, Facebook founder Mark Zuckerberg could avoid ever reporting any income simply by borrowing against his assets to meet his living expenses. "Perhaps most bizarrely, Zuckerberg might be eligible for an Earned Income Tax Credit if he keeps his personal income under $13,000," writes Mr. Carney.
This would make America a better place how? Yet, at bottom, such cosmetic fixes are the main outcome from using higher tax rates to "correct" income inequality. . . .
One can only wonder how much faster progress on tax reform or school choice would have been if the political capital devoted to income inequality had been devoted to fighting entrenched institutional resistance to useful reforms. . . .
That goes doubly for the inequality obsessives. How society stimulates the creation and distribution of income is an important topic—so important that one could wish it were less infected with the pathology Freud diagnosed as "group spirit" and which he said was ultimately founded on envy.
As Freud put it, "Everyone must be the same and have the same. Social justice means we deny ourselves many things so that others may have to do without them as well.""
Now let's address why wage inequality exists and what, if anything, can be done about it.
Key Reason for Wage Inequality Is Education delivers solid evidence of how to increase earned income:
"The widening gap between America’s haves and have-nots (highlighted in a Journal article today) is fueling debate across the political spectrum. But here’s one less-appreciated take-way: It suggests getting a college education — and indeed, an advanced degree — might just be worth the hefty price tag.
Let’s back up. As most people know, the cost of a four-year college education is rising, forcing students to take on a pile of debt that some economists fear will spark America’s next debt mess. There’s talk of a student-loan “bubble.” And some feel America should be funneling more kids into vocational training instead of encouraging everyone to get seemingly useless liberal arts degrees — something Germany already does.
The Labor Department’s latest figures on wages, however, suggest that the gap between America’s highest- and lowest-paid workers continues to grow — and a key reason for this is education.
David Autor at the Massachusetts Institute of Technology calls this the “rising return to education.”
Put simply, the growth of highly-educated people in the U.S. hasn’t kept up with demand, Autor says, which means college graduates and Ph.D’s in the job market, especially those in areas like the sciences, are a hot property.
As James Surowiecki of the New Yorker magazine put it in November, no matter how hard it is for recent college grads, it’s much worse for people lacking a college degree. “The college wage premium — how much more a college graduate makes than someone without a degree — is at an all time-high,” he wrote. “As college has, in relative terms, become more valuable economically, people have become more willing to pay more for it.”"
Summing Up
Wage inequality is healthy in a free market based society.
The focus needs to be on raising people's education and thereby reducing wage inequality.
Lift all boats through individual and collective knowledge growth, in other words.
In turn, America will become an even more prosperous society.
As our society becomes more prosperous, it will be positioned properly to better provide educational and employment opportunities for all of our citizens.
Let's not kill the goose that laid the golden egg in the name of false placed equality.
Education, hard work and a little luck are still the keys to success.
And they're all right here for the taking.
Thanks. Bob.